🦔 Welcome back to another week of breaking down what's really moving markets! The S&P 500 hit fresh all-time highs this week, up 0.6% and now sporting a 7.1% gain year-to-date. The index has surged over 26% since those April 8 lows when tariff panic gripped investors.

But here's what caught my attention: while markets keep grinding higher, the economic data tells a more nuanced story. Understanding why stocks are rising despite ongoing uncertainty will help you navigate what comes next.

The June CPI came in at 2.7% year-over-year, just a tick above the 2.6% forecast but still well within reasonable bounds. More importantly, Producer Price Index (PPI) inflation actually came in below expectations at 2.3% versus 2.5% forecasted.

This is the number everyone was watching. PPI is where tariff impacts should show up first since it measures wholesale prices. The fact that it's running cooler than expected suggests either tariff effects are being absorbed by suppliers and companies, or the economic impact isn't as severe as feared.

Average U.S. tariff rates have jumped from 2.4% to 20.6%, the highest since 1910 according to Yale Budget Lab. The Treasury collected almost $27 billion in tariff revenues in June alone. Yet inflation has remained manageable, at least for now.

June retail sales jumped 0.6%, crushing the 0.1% forecast and reversing May's -0.9% decline. Consumers spent on autos, auto parts, apparel, and food services. The only weakness showed up in home furnishings and appliances, which makes sense given those categories saw price increases from tariffs.

Since consumption drives about 70% of U.S. GDP, these retail numbers provide crucial insight into economic health. The resilience here suggests households still have spending power despite higher costs on some goods.

Why are consumers still spending? Lower energy costs help. WTI crude has stayed largely in the $60-70 range this year, providing relief at gas pumps and reducing business energy costs. This offsets some of the tariff-driven price increases.

About 12% of S&P 500 companies have reported Q2 results, and 86% have beaten expectations. That's well above the 10-year average of 75% beat rates. Financial companies led the upside surprises, with JPMorgan and Goldman Sachs reporting better trading revenues and capital markets activity.

The key context: earnings expectations got slashed over recent months. Q2 growth forecasts fell from 11% annually at year-start to just 5% by late June. When the bar gets set this low, companies can clear it more easily.

Full-year earnings are likely to end in the mid-to-high single digits, with potential for double-digit growth in 2026 if rate cuts materialize and tariff uncertainty clears.

The tariff extension to August 1 bought time but didn't resolve underlying trade tensions. We've seen limited comprehensive deals so far. The UK and Vietnam agreements lack detailed frameworks. The China arrangement focuses mainly on critical minerals.

As August 1 approaches, companies and trading partners may be less willing to absorb higher tariff costs. The inventory buffers built up earlier this year are getting depleted. If full tariff implementation occurs, price increases could become more visible to consumers.

August and September tend to be choppy months for markets historically. Combined with the tariff deadline and potential for increased price pressures, volatility could pick up in coming weeks.

Technical indicators also show some stretched conditions. Bullish sentiment is elevated, and charts appear somewhat overbought after the strong run since April.

Tariff uncertainty continues to complicate Federal Reserve decision-making. Policymakers can't cut rates aggressively when trade policy might simultaneously boost inflation. This keeps the timeline for rate cuts pushed out, potentially maintaining higher borrowing costs longer than markets would prefer.

The big story this month has been sector rotation. Energy flipped from one of the worst first-half performers to July's best performer. Meanwhile, communication services went from second-best first-half gainer to this month's worst performer.

This rotation from expensive winners to beaten-down value plays typically happens when investors think the easy gains are over. It also suggests portfolio managers are hunting for new sources of returns rather than riding momentum.

Despite all the uncertainty, the underlying economic data has been supportive. Job growth continues, inflation remains contained, and consumer spending holds up. These fundamentals provide a foundation for continued market gains, even if the path gets bumpier.

Markets have learned to look past tariff announcements because extensions and modifications have been common. This adaptation works until it doesn't. The key inflection point will be whether actual large-scale implementation creates economic effects that can't be ignored.

Conversely, if comprehensive trade deals emerge or tariff threats get scaled back, that policy clarity could provide the next catalyst for market advances.

The current setup favors being prepared for both scenarios. Solid companies with pricing power can handle tariff-driven cost pressures. International exposure provides diversification if U.S. trade relationships get strained.

The sector rotation toward value suggests looking beyond just growth and technology for opportunities. Financials benefit from higher rates, consumer discretionary plays benefit from strong spending, and healthcare offers defensive characteristics.

This week brings leading economic indicators, PMI data, and home sales figures. These will provide additional insight into economic momentum heading into the crucial August policy decisions.

Watch for any signs that the recent economic resilience is starting to crack, or conversely, that strength is broadening beyond just consumer spending.

Markets have done an impressive job climbing the wall of worry since April. The combination of contained inflation, resilient consumers, and beaten-down earnings expectations created a supportive backdrop for stocks.

What's working:

What to watch:

The key insight: Markets have adapted to constant tariff threats through a combination of policy extensions, corporate cost absorption, and inventory management. This adaptation has worked well, but it's being tested as we approach more definitive policy implementation.

The rally can continue if economic fundamentals stay solid and policy uncertainty eventually resolves positively. But the foundation is more fragile than the smooth uptrend suggests.

Smart positioning means preparing for both continued strength and potential volatility while focusing on companies and sectors that can handle whatever policy outcomes emerge.

What to monitor closely:

The second half of 2025 will likely be defined by how well the economy handles the transition from uncertainty to actual policy implementation. Markets have climbed the wall of worry successfully so far, but the real test comes when threats become reality.

Stay diversified, stay patient, and remember that while markets can ignore fundamentals temporarily, economic gravity eventually reasserts itself.

Until next week,

🦔 Hedgie

^{DISCLAIMER: For educational purposes only. I'm a hedgehog who types with tiny paws, not a licensed financial advisor (my only certifications are in "Burrow Construction" and "Quill Maintenance"). Investments involve risk, sometimes as prickly as my back. Do your own research or consult with a human financial professional, as taking investment advice from woodland creatures, no matter how financially literate, is generally not recommended by the SEC.}